Sheet (3)

Tegara English
First year
SECOND TERM
inventories and Chapter
the cost of goods
sold
8
Edited by Dr/ Magdy Kamel
Tel/ 01273949660
1 | Page Dr. Magdy Kamel
 Chapter (8)
Inventories & the cost of goods sold
There are three methods of recording purchases & sales under different prices.

1) First In First Out  FIFO ‫الوارد اوال يباع اوال‬

2) Last In First Out  LIFO ‫الوارد اخيرا يباع اوال‬
3) Weighted Average Method

Example
Ahmed Company uses the Periodic Inventory System, the following transactions show
beginning inventory & purchases of Product No.M25 for the month of July.

 1 July Beginning Inventory, 3,000 Units, Cost 5 Each ……….. 15,000

 6 July Purchases, 5,000 Units, Cost 6 Each ………….…………… 30,000
 17 July Purchases, 6,000 Units, Cost 7 Each …………….……….. 42,000
 23 July Purchases, 4,000 Units, Cost 8 Each ……………………….. 32,000
 26 July Purchases, 2,000 Units, Cost 9 Each ……………………….. 18,000
137,000

A physical count indicates 4,000 units in inventory at the end of July.

Required
a) determine both the cost of goods sold & ending inventory, using the following
methods

1) FIFO Method 2) LIFO Method 3) Average cost Method

Solution
Data
Ending Inventory = 4,000

Total Units Sold = Beginning Inventory + Purchases – Ending Inventory

= 3,000 + (5,000 + 6,000 + 4,000 + 2,000) – 4,000
= 20,000 – 4,000 = 16,000 Units

2 | Page Dr. Magdy Kamel

1) FIFO Method ‫الوارد اوال يباع اوال‬
1) Cost Of Goods Sold = 3,000 × 5 = 15,000
+ 5,000 × 6 = 30,000
+ 6,000 × 7 = 42,000
+ 2,000 × 8 = 16,000 103,000  Cost Of Goods Sold

2) Ending Inventory = 2,000 × 8 = 16,000

+ 2,000 × 9 = 18,000
34,000  Ending Inventory

2) LIFO Method ‫الوارد اخيرا يباع اوال‬

1) Cost Of Goods Sold = 2,000 × 9 = 18,000
+ 4,000 × 8 = 32,000
+ 6,000 × 7 = 42,000
+ 4,000 × 6 = 24,000
116,000  COGS

2) Ending Inventory = (1,000 ×6) + (3,000 × 5) = 21,000

3) Average Cost Method ‫المتوسط‬

total cost 137000

Average Cost = total units = 20000 = 6.85 per Unit

1) Cost Of Goods Sold = 16,000 × 6.85 = 109,600

2) Ending Inventory = 4,000 × 6.85 = 27,400

Comments

Case (1)
 If the purchase price is going up (increase) using FIFO method will increase the net
income Because the cost of goods sold under FIFO is low
While using LIFO will decrease the net income because the cost of goods sold is high
 If the purchase price is going down ( decrease) using LIFO method will increase the net
income because the cost of goods sold is low
while using FIFO will decrease the net income because the cost of goods sold is high

3 | Page Dr. Magdy Kamel

Exercise (8-2) page 360
on may 10, merlin computers sold 80 portx labtop computers to college text publishers,
at the date of this sale, merlin’s perpetual inventory records included the following cost
layers for poftex laptops:
Purchase date Quantity Unit cost Total cost
Apr. 9 60 $800 48,000
May 1 40 $850 34,000
Total on hand 100 82,000

Prepare journal entries to record the cost of the 80 portex laptops sold on may 10,
assume that merlin computers uses the:
a. specific identification method (50 of the units sold were purchased on april 9,
and the remaining units were purchased on may 1).
b. average cost method.
c. FIFO method.
d. LIFO method.
Discuss briefly the financial reporting differences that may arise from choosing the FIFO
method over the LIFO method.
Solution
Cost Of Goods Sold 80 Units

A) using the Specific Methods

The cost of goods sold is
April 1  50 × 800 = 40,000
May 1  30 × 850 = 25,500
65,500
B) using Average Cost Method
total cost 82000
Average Cost = total units = 100 = 820 per unit
Cost Of Goods Sold = 80 × 820 = 65,600
C) using FIFO Method
April 1  60 × 800 = 48,000
May 1` 20 × 850 = 17,000
Cost Of Goods Sold = 65,000

4 | Page Dr. Magdy Kamel

D) LIFO Method
May 1  40 × 850 = 34,000
April 1  40 × 800 = 32,000
Cost Of Goods Sold = 66,000

because the prices are going up ( increase )  using FIFO leads to increase the amount of
profit because the cost of goods sold under FIFO is lower than the cost of goods sold
under LIFO

Exercise (8-10) Page 363

Herbo company uses a periodic inventory system the company records show the
beginning inventory of product number T12 is on January 1th, the purchases of this item
during the current year to be as follows:
 January 1st beginning inventory 900 units @$10 each total 9000
 February 23 rd
purchase 1,200 units @$11 each total 13,200
 April 20th purchase 3,000 units @$11.20 each total 33,600
 May 4 th
purchase 4,000 units @$11.6 each total 46,400
 November 30th purchase 900 units @$13 each total 11,700

A physical inventory indicates 1,600 units in inventory at year – end.

1. determine the cost of the ending inventory based on each of the following methods of
inventory valuations:
a. average cost
b. FIFO
C. LIFO

2. which of the above methods if any results in the same ending inventory valuation
under both periodic and perpetual costing procedures.

Solution
Notes
Total unit = 10,000
Ending Inventory = 1,600 Units
Units Sold = 10,000 – 1,600 = 8,400 Units

5 | Page Dr. Magdy Kamel

A) Average Cost Method
total cost 113900
 Average Cost Per Unit = total units = 10000 = 11.39 Per Unit
1. Cost Of Goods Sold = 8,400 × 11.39 = 95,676
2. Cost Of Ending Inventory = 1,600 × 11.39 = 18,224

B) using FIFO Method

1. Cost Of Goods Sold = (900 × 10) = 9,000

+ (1,200 × 11) = 13,200
+ (3,000 × 11.20) = 33,600
+ (3,300 × 11.60) = 38,280
= 94,080  COGS
2. Cost Of Ending Inventory = (700 × 11.60) + (900 × 13) = 19,820

C) using LIFO Method

1. Cost Of Goods Sold = (900 × 13) = 11,700

+ (4,000 × 11.60) = 46,400
+ (3,000 × 11.20) = 33,600
+ (500 × 11) = 5,500
= 97,200  COGS
2. Cost Of Ending Inventory = (700 × 11) + (900 × 10) = 16,700

Notes
Using FIFO Method results in the same ending inventory valuation under perpetual &
periodic system because the cost of ending include the recent price

6 | Page Dr. Magdy Kamel

MULTIPLE CHOOSE QUESTION
Use the following information for questions 1– 4.
A company using periodic inventory system and just starting business, made the
following four inventory purchases in June:
 June 1 1500 units $ 9,000
 June 10 2000 units 14,000
 June 15 3000 units 24,000
 June 28 1500 units 15,000
 Total 8000 units $ 62,000
A physical count of inventory on June 30 reveals that there are 2000 units on hand.
1. Using the LIFO inventory method, the value of the ending inventory on June 30 is
a. $ 12,500
b. $ 19,000
c. $ 12,000
d. $ 20,000

2. Using the FIFO inventory method, the amount allocated to cost of goods sold for
June is
a. $ 49,500
b. $ 42,000
c. $ 43,000
d. $ 50,000

3. Using the average-cost method, the amount allocated to the ending inventory on
June 30 is
a. $ 16,000
b. $ 15,500
c. $ 14,000
d. $ 12,000

4. The inventory method which results in the highest gross profit for June is
a. the FIFO method.
b. the LIFO method.
c. the weighted average unit cost method.
d. not determinable.
7 | Page Dr. Magdy Kamel
Use the following information for questions 5–7.
At May 1, 2008, Treeline Company had beginning inventory consisting of 100 units
with a unit cost of $7. During May, the company purchased inventory as follows:
 200 units at $7 each
 300 units at $8 each
The company sold 500 units during the month for $12 per unit. Treeline uses the
average cost method.
5. The average cost per unit for May is
a. $7.00.
b. $7.50.
c. $7.60.
d. $8.00.

6. The value of Treeline’s inventory at May 31, 2008 is

a. $700.
b. $750.
c. $800.
d. $4,500.

7. Treeline’s gross profit for the month of May is

a. $2,250.
b. $3,750.
c. $4,500.
d. $6,000.

8 | Page Dr. Magdy Kamel

Use the following information for questions 8-11.
Tier II Company uses a periodic inventory system. Details for the inventory account
for the month of January, 2008 are as follows:
Units Per unit price Total
 Balance, 1/1/08 200 $5.00 $1,000
 Purchase, 1/15/08 100 5.30 530
 Purchase, 1/28/08 100 5.50 550
An end of the month (1/31/08) inventory showed that 120 units were on hand.

8. How many units did the company sell during January, 2008?
a. 80
b. 120
c. 200
d. 280

9. If the company uses FIFO, what is the value of the ending inventory?
a. $520
b. $600
c. $656
d. $1,424

10. If the company uses LIFO, what is the value of the ending inventory?
a. $520
b. $600
c. $656
d. $1,480

11. If the company uses FIFO and sells the units for $10 each, what is the gross profit
for the month?
a. $1,376
b. $1,424
c. $2,800
d. $3,000

9 | Page Dr. Magdy Kamel

Use the following inventory information for questions 12–14.
 July 1 Beginning Inventory 20 units at $19 $ 380
 July 7 Purchases 70 units at $20 1,400
 July 22 Purchases 10 units at $22 220
Total $ 2,000
A physical count of merchandise inventory on July 31 reveals that there are 30 units
on hand.
12. Using the average-cost method, the value of ending inventory is
a. $580.
b. $600.
c. $610.
d. $620.

13. Using the FIFO inventory method, the amount allocated to cost of goods sold for
July is
a. $580.
b. $620.
c. $1,380.
d. $1,420.

14. Using the LIFO inventory method, the amount allocated to cost of goods sold for
July is
a. $580.
b. $620.
c. $1,380.
d. $1,420.

10 | Page Dr. Magdy Kamel

Use the following information for questions 15–17.
 Nov. 1 Inventory 15 units @ $8.00 each
 Nov. 8 Purchase 60 units @ $8.60 each
 Nov. 17 Purchase 30 units @ $8.40 each
 Nov. 25 Purchase 45 units @ $8.80 each
A physical count of merchandise inventory on November 30 reveals that there are 50
units on hand. Assume a periodic inventory system is used.

15. Cost of goods sold under the average-cost method is

a. $860.
b. $856.
c. $845.
d. $800.

16. Ending inventory under FIFO is

a. $438.
b. $846.
c. $421.
d. $863.

17. Ending inventory under LIFO is

a. $438.
b. $421.
c. $846.
d. $863.

11 | Page Dr. Magdy Kamel